Most homeowners will be able to get a hassle-free remortgage, but sometimes it isn't the right choice. Your original mortgage offer letter should point out some things to look out for. These might include:
When early repayment charges are high
If you leave your mortgage deal early, you may be charged an early repayment fee, which might mean that, financially, remortgaging doesn’t make sense.
Let’s say you have a remaining mortgage loan of £50,000 and the early repayment charge in your contract is 5%. You’d be charged an exit fee of £2,500. As a result, sticking with your current mortgage – at least until the early repayment charge clause expires – can sometimes outweigh the benefits of remortgaging.
If your remaining mortgage is too small
If your remaining mortgage debt is relatively small, say less than £50,000, then the fees involved with switching lenders sometimes make a remortgage financially impractical. Usually that’s not the case though.
As a basic rule of thumb, the smaller your mortgage is, the more impact any remortgage fees will have. And once your mortgage gets down to around £25,000, some lenders simply won’t consider you for a remortgage at all.
Why remortgaging to pay off debt can be a bad idea
Debt consolidation sounds sensible: a good way to pay off money owed, by combining different bits of debt into your mortgage. The idea is to move high-interest debts, like credit cards, which cost you a lot of money each month, into a low-interest, long-term remortgage. But it’s not always sensible.
That’s because even though interest rates on mortgages are normally lower than rates on personal loans – and much lower than credit cards – you might end up paying far more overall if the loan is over a longer term.
For example, let’s say you have debts of £10,000 and you remortgage with 4% interest over 20 years. In the first year you’d pay £393.93 in interest, then over the 20 years your total interest will be £4,543.53.
Now take that same £10,000 loan and pay it off at a higher interest rate, 15%, over 3 years. That first year you’ll pay £1,309.29 in interest. But over the 3 years, you pay less interest in total: £2,479.52.
Essentially, as long as you can afford the larger monthly payments, a credit card or personal loan can be a more effective way to handle your debt than a so-called ‘debt consolidation’ remortgage deal. Remember to consider the loan length and how much overall you’ll be paying.
The other major issue with paying off debt with a remortgage is that you’re switching unsecured debt to secured debt – secured against your property. This means you could be putting your home at risk if you can’t afford to make the monthly mortgage repayments.
If you need a hand dealing with debt, there’s more information on the Money Advice Service.